It is sadly true that bankruptcy proceedings are sometimes used by perfectly solvent individuals for purposes other than seeking to satisfy their creditors or manage their debts. However, as a High Court case showed, alleging such conduct is one thing and proving it quite another
The case concerned a man who was adjudicated bankrupt on the petition of a friend and business associate. He was at the time engaged in divorce proceedings and, soon after the bankruptcy order was made, a family judge directed him to transfer his interest in the former matrimonial home to his ex-wife. The latter order was frustrated in that all his assets were vested in his trustees in bankruptcy.
The ex-wife accepted that he owed his friend a genuine debt and did not assert that his motive or purpose was to baulk her claim to his share of their former home. She applied to annul his bankruptcy, however, on the basis that he was not in fact insolvent when the bankruptcy order was made. She asserted that he and his friend had colluded in his bankruptcy by failing to declare all his assets and introducing inflated debts.
Rejecting her application, however, the Court found the man to be an honest witness. He had borrowed money from his friend to assist him in meeting the legal costs of his divorce. After he failed to repay the loan, the friend ran out of patience and petitioned for his bankruptcy. There was no evidence of collusion between them and the evidence supported a finding that, when the bankruptcy order was made, he was unable to pay his debts as they fell due.